Thursday, March 10, 2016

This post is prompted by the Australian government’s
discussion paper entitled “Objective of Superannuation” released yesterday. The government is raising the
matters as part of a consultation process prior to introducing legislation to specify
the objective of superannuation in legislation. The discussion paper uses the
word “enshrine”, rather than “specify”, but that seems inappropriate.

Unfortunately, the paper fails to point out that in
specifying the objective of super the government is (or should be) focused on public
policy, rather than the wide range of different objectives of different individuals and firms with an interest in super. Some people
use super to build wealth to pass to their children. Some people use it to save
for retirement. I expect that many people don’t have a clear objective in mind, but view
super as a useful savings mechanism. Employers may view super as a way of
attracting staff or ensuring that valued staff are able to live comfortably
after retirement. The financial institutions that provide superannuation
products have different objectives again.

The question the legislation should be trying to clarify is:
What is the objective of government legislation with respect to superannuation? If we have an answer to that question we may be in a better position to consider questions such as whether there might
be a case for individuals to continue to be encouraged, nudged or even compelled (as at present) to save via superannuation .

The government proposes to legislate the objective recommended
by the Financial System Inquiry:

“To provide income in retirement to substitute or supplement
the Age Pension”.

In my view that is a sensible public policy objective. The government should be encouraging people to become more self-reliant rather than expecting taxpayers to support them in their old age. This is particularly important given the projected increases in the government spending on pensions in coming decades and the many other burdens being placed on taxpayers.

The subsidiary objectives raised for discussion tend to cloud
the issues. For example, “facilitating consumption smoothing over the course of
an individual’s life” is presumably also an objective of the age pension, unemployment
benefits and other welfare payments. Some other suggested subsidiary objectives
relate to prudential regulation and fiscal policy.

A potential problem I see with the proposed clarification
of the objective is that pursuit of that objective in isolation could result in a
less efficient tax system than we currently have.

Even
though they do not do as much as they should to substitute or supplement the
aged pension, the current tax concessions for super do reduce the bias
against savings and investment under the income tax system. The concessions
reduce the extent that individuals who save, and re-invest income from their
savings, pay a higher lifetime tax bill than people with similar earnings who
choose to save less. The bias against savings and investment will be
exacerbated if super tax concessions are reduced without more fundamental
reforms being taken to improve incentives for savings and investment.

I was also concerned about this when writing about the
potential for tax reform on this blog in April last year. Whilst suggesting
that it made sense to include reductions in super tax concessions as part of a
tax reform package, I hoped that the government did not forget to obtain a
substantial reduction in tax on capital incomes as a quid pro quo.

It will be interesting to see whether specifying a sensible objective
for superannuation policy helps to achieve a better overall tax policy
outcome.

Monday, March 7, 2016

The great tax debate began about a year ago when Joe Hockey,
the former Treasurer, released a discussion paper prepared by Treasury. Rather than
suggesting a small range of options for consideration, the discussion paper put
66 questions on the table.

The answer that the authors were hoping to be given to some
questions was, nevertheless, fairly obvious. For example, when they asked how
important is it to reform taxes to boost economic growth, it was fairly obvious
that the authors were hoping to told it was important. When they asked how
should Australia respond to the global trend toward reduced corporate tax
rates, they were probably hoping to be told that Australia should seek to have
a tax system that would not deter foreign investment. Information provided in
the report implied fairly clearly that there could be economic gains from
relying less heavily on company taxes and stamp duties levied by State governments
and more heavily on GST and taxes on labour income.

However, the debate had hardly begun before Tony Abbott, the former
prime minister, began taking options off the table. He might have had good
reasons for that, but he kept them to himself. So, by the time Malcolm Turnbull
took over as prime minister, the great tax debate was becoming a fiasco.

Not long after prime minister Turnbull declared that all
options were back on the table, the Labor opposition began to claim that the
government was intending to raise and/or broaden the GST. The pressure became so
intense that the government announced a decision on the matter prior to
announcing the tax policy reform proposals it plans to take to the next
election. The PM stated:

"After you take into account all of the compensation
that you would need to ensure the change was equitable, it simply is not
justified in economic terms."

That has elicited a range of responses from economic
commentators. The most general response seems to have been that if a GST increase is
ruled out, that removes the potential for the government to go to the election
with a major tax reform program that would encourage economic growth. Some
commentators have suggested that such an outcome was predictable in any case,
so there was no point in having the great tax debate.

I don't think either of those responses is appropriate.

Time will tell whether the government is able to come up with a credible tax
reform package that will encourage economic growth. There is potential to do
so, but it will require the Commonwealth to transfer back to the States the
responsibility for raising more of the revenue required to pay for schools and
hospitals. The politics of the federation probably require the Commonwealth to
take a leading role in the tax reforms required at state level to enable that
to happen. The potential exists for the Commonwealth to play a leading role
because the payroll tax was once a Commonwealth tax before being given to the
States, in the forlorn hope that they would use it as a growing source of
revenue and become less dependent on Commonwealth grants.

Even if the conclusion of the great tax debate is that there
are no easy tax switch options to encourage economic growth, that doesn’t mean
that the debate was not worth having. If enough people had read and understood
the stuff I was writing on this blog (here and here) around this time last year, they might
have concluded at that point that there are no costless taxes and that the focus of the debate should be on how to reduce government spending. Other people were writing similar things - more
people probably read and understood some of their contributions - but they still had a negligible impact on understanding of the issues by
the general public.

The great tax debate was worth having as a public education
exercise. In order for people to persuade themselves to think seriously about
ways to reduce government spending they need to bring themselves to understand that there are no costless ways to raise additional government
revenue.

Postscript:When I wrote this a couple of days ago I had assumed that after the government rejected their proposal to increase GST in order to reduce the company tax rate the Business Council of Australia (BCA) had probably picked up its bat and ball and gone home to sulk for another decade or so . Yesterday, however, they have come back into the game stronger than before. The BCA has now proposed a tax reform agenda that will be difficult for this government to sweep off the table. It is well worth taking a look.

Emancipation

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